Market pricing refers to the pricing strategy used to determine prices for products and services based on the market price (or current average price for similar items) – a variation on cost-based pricing. The market price is the point at which supply meets demand, determined by a basic rule of economics: “quantity supplied equals quantity demanded.” It’s a competitive pricing strategy that considers competitors and customer perceptions when setting prices.

Market-based pricing is popular for businesses with a lot of competition. For example, companies selling raw ingredients to restaurants rely on the market price for their products because it provides them with the most accurate information to set prices. This allows them to adjust prices quickly as market conditions change. It also helps them build brand value by offering premium products to increase revenue.

For compensation professionals, market pricing is a key part of many processes and decisions: setting salary structures, designing short-term incentive plans, conducting internal equity analyses, and distributing merit increases during performance management all rely on accurate market data. So, it’s critical that the market pricing process is thoughtful and well-organized to produce accurate results.

A drawback of market pricing is that it doesn’t take into account customer or buyer perceptions of product/service value, so you might overestimate how much they’re willing to pay. You might also misunderstand their price sensitivities or be unable to differentiate your service from others. Luckily, you can use market pricing along with other strategies that take your costs into consideration (like cost-plus), to create a more well-rounded model for setting prices.